美國西屋制動公司 (WAB) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Wabtec Fourth Quarter 2017 Earnings Release Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Tim Wesley, Vice President of Investor Relations. Please go ahead.

Thank you, Kate. Good morning, everybody. Welcome to our 2017 fourth quarter earnings call. Let me introduce the others here with me in the room, Ray Betler, our President and CEO; Pat Dugan, our CFO; and John Mastalerz, our Corporate Controller.

As usual, we will make our prepared remarks and then we will be happy to take your questions. Of course, during the call, we will make forward-looking statements so we ask that you please review today's press release for the appropriate disclaimers.

Now before I hand it off to Ray, I'll say one more bit of housekeeping. We have set the date for our Investor Day. It's going to be May 7, in New York, in Midtown. We will provide more details shortly, but in the meantime, please consider this a save-the-date notice and again, we'll let you know more details shortly.

With that, Ray, go ahead.

Okay, thanks, Tim. Good morning, everyone. It's good to talk to you today. For Wabtec, 2017 was a year of transition and positioning the company for the future. We did not meet our expectations for financial and operational performance, but we accomplished quite a bit during the year, and we believe that our company today is stronger and better positioned than it was a year ago.

Our 2017 accomplishment include the following: we made excellent progress on the Faiveley integration, including changes in both people and processes; we improved our cash flow generation each quarter during the year; we continued to invest in our worldwide growth strategies. We expect to build on those accomplishments during 2018 based on our record and growing backlog, the improvements we're seeing in our Freight aftermarket, our Wabtec Excellence Program, which gives us the fuel to generate cash and increase margins over time. I can tell you that we are all committed to once again demonstrate our ability to deliver profitability and consistent growth this year and in years ahead, and we'll explain that to you how we plan to accomplish that throughout this call.

So before I continue, I want to turn it over to Pat and allow him to review the numbers for 2017.

Thanks, Ray.

Sales for the fourth quarter were $1.08 billion. When you look at our segments, the Transit segment sales increased about 70%. This increase was due to acquisitions, which contributed about $192 million of sales, we had organic growth of about $88 million and a favorable FX impact of about $13 million. This is the second quarter in a row we've seen organic sales growth in Transit, which demonstrates that our record backlog is starting to kick in.

Our Freight segment sales increased 7%, the first year-on-year increase since the fourth quarter of 2015. The increase was due to sales from acquisitions, $27 million, a favorable FX that added about $4 million, and that was offset by slightly lower organic sales of about $9 million. Sales of $364 million were the highest level for Freight in 6 quarters, and the backlog remains stable. Freight aftermarket sales showed year-on-year growth for the second quarter in a row, all of these are positive indicators.

Looking at our consolidating operating income -- consolidated operating income. It was about $91 million. As mentioned in our press release this morning and in our preannouncement a few weeks ago, this included contract adjustments of $24 million and restructuring and integration expenses of about $18 million. The restructuring and integration expenses were for ongoing cost-cutting actions and were included in both cost of sales and SG&A. The contract adjustments reflect Higher-than-expected cost on certain existing projects and were included in the cost of sales line. With these contract adjustments, we have completed a review of our project portfolio and believe our new estimates reflect the reality of the current status for these projects. If you exclude the contract adjustments and restructuring expenses, operating income was $133 million or about 12.4% of sales. That was lower than our target for the quarter, and is due mainly to the negative product mix and some higher project costs in the U.K.

Going forward, our 2018 target is about 13.5% EBIT margin, with an improvement expected during the year.

SG&A was about $144 million, including the restructuring and integration expenses and -- but going forward, we expect it to be about $135 million to $145 million per quarter.

Engineering expense and amortization costs were up mainly due to the Faiveley acquisition. We expect similar quarterly run rates in 2018.

Looking at our operating income per segment. In Transit, if you exclude the expenses of $35 million for the contract adjustments, restructuring and integration, our Transit adjusted operating income increased 191%, with an adjusted operating margin of about 9.5%. This is lower than expected due to those higher project costs in the U.K. I mentioned earlier.

Freight, if you look at the -- if you exclude the expenses of $6 million for the contract adjustments, restructuring and integration, our Freight adjusted operating income increased 11%, with an adjusted operating margin of 20.5%.

In 2018, we are targeting operating margin improvements for both these segments compared to the adjusted margins in the fourth quarter. These improvements will come through better project performance, better mix as we complete our lower-margin contracts and the benefits of our restructuring programs and our cost reduction programs.

Interest expense for the quarter was about $18 million, and going forward, we expect interest expense to be roughly the same, although we are focused on generating cash to reduce debt and obviously, reduce our interest expense.

Our effective tax rate for the quarter was about 33.5%, which was affected by the new U.S. Tax Reform Bill that was passed in December of '17.

In the quarter, we recorded the following impacts from the Bill: expense of about $55 million for the repatriation tax, and a benefit of $47 million from a reduction in our deferred tax liabilities. This resulted in a net expense from the U.S. tax reform in the fourth quarter of about $8 million. Excluding this, the company's effective tax rate in the quarter was 22.9%.

Our 2018 assumption is very similar, about 23.5% for effective tax rate. And remember, that's an annual estimate. The individual quarters will vary due do discrete -- the timing of any discrete items.

Okay, just to help a little bit with the math in the fourth quarter EPS, I'm just going to kind of walk you through a bridge from GAAP to our adjusted EPS. GAAP earnings per diluted share were $0.51. The contract adjustments, restructuring and integration expenses and tax item reduced EPS by a total of $0.39, so our adjusted EPS was $0.90. So just to reconcile, we start with $0.51 on a GAAP basis, add back contract adjustments and cost of sales of about $0.18, add back restructuring and integration expenses, which are split between cost of sales and SG&A of an additional $13 million -- $0.13, excuse me, $0.13, add back the impact of our tax reform, which is about $0.08, that gets us to a net income per diluted share, excluding those items, of about $0.90 for the fourth quarter.

A similar reconciliation for the full year is in our press release, but I'll just walk you through that really quickly. Our net income per diluted share in accordance with GAAP is $2.72, $2.72. You add back the year-to-date contract adjustments and cost of sale, that's about $0.32, you add back our restructuring and integration costs, which are elements of both cost of sales and SG&A, that's another $0.30, and you add back any other items, which were mainly tax-related of about $0.09. And that gets us to a net income per diluted share, excluding the items above, of about $3.43 for the year.

Our balance sheet remains strong. It provides us the financial capacity and flexibility to invest in our growth opportunities. We have an investment-grade rating, and we -- our goal is to maintain that. We expect to maintain that investment-grade credit rating.

Cash from operations. We finished with a good quarter, generating $162 million of cash from operations, and that's in part due to improved working capital performance. Working capital consisted of receivables of about $801 million, inventories were about $743 million, and payables were about $553 million. In addition, we had unbilled receivables of $366 million, which are offset by customer deposits of about $370 million.

Cash at year-end on the balance sheet, about $233 million, mostly outside the U.S. Debt at year end, we had debt of about $1.87 billion, or about almost $1.9 billion, and that consisted of about $750 million of 10-years senior notes, $250 million of bonds, a term loan balance of about $370 million and a revolver of about $480 million.

Taking this into account, our net debt-to-EBITDA is about 3x.

As in prior years, I just want to remind everybody that our cash from operations tend to increase during the year for a variety of reasons. We expect to see only a slightly positive number in Q1, with improvement that builds throughout the year.

Just a couple miscellaneous items to help you all. Our depreciation for the quarter was $17 million compared to $14 million in last year's quarter, and for the full year of 2018, we expect it to be about $70 million. Amortization expense was $9.5 million compared to $6.6 million in last year's quarter, and for the full year of 2018, we expect it to be about $38 million.

Our CapEx, our capital expenditures in the quarter were $29 million versus $19 million a year ago. And in 2017, our CapEx spending was $90 million, and we are budgeting about $120 million for 2018.

Some information about backlog. We had another good quarter for generating new orders as you can see from the numbers we reported in the press release. At year-end, our multiyear backlog was a record $4.6 billion, and our book-to-bill in the fourth quarter was $1.06 billion. Our rolling 12-month backlog, which is a subset of the multiyear number, was at a record $2.3 billion, a 3% increase compared to the end of the third quarter, which is a positive sign heading into 2018.

So with that, I'll turn it back over to Ray.

Okay, Pat. Thank you. Before I go into our guidance for 2018, I'm going to make a couple of comments about our long-term vision. Our long-term vision for this company hasn't changed. We believe that we have a strong growth opportunity over the next 5 years to continue to accomplish what we've done in the past, and we believe that we very much have a road map to get there, and our 2018 plan is the starting point for that.

So with that, I'd like to go into the guidance for the year. We expect our revenues to be about $4.1 billion, with adjusted earnings per diluted share of about $3.80, excluding restructuring and integration charges. Compared to 2017, this would represent revenue growth of about 6% and adjusted EPS growth of about 11%. Our adjusted first quarter EPS in 2018 is expected to be similar to our adjusted EPS of fourth quarter 2017. We expect to generate cash from operations in excess of net income. Our key assumptions include the following: revenue growth in both of our segments, as Pat said, our consolidated operating margin target for the year is about 13.5%. Pat mentioned we should see improvements during the year through better project performance, and as we complete our margin contracts and bleed those out, we get the benefit of restructuring and also cost reduction programs. Our tax rate is expected to be about 23.5% for the year. We're assuming diluted shares outstanding will be about 96 million for EPS calculation purposes.

So our goals in 2018 are very straightforward: to meet our financial plan, to generate cash, to invest in growth opportunities while strengthening our balance sheet, and to capture the synergies and growth we expect from the Faiveley acquisition.

So let's talk about synergies. Relative to integration in our synergy plan, we are ahead of schedule. But I can also say that the integration has been more complex, more difficult and taking more effort than we anticipated. In 2017, we generated about $30 million of synergies compared to our target of $15 million to $20 million. In 2018, we expect to achieve an additional $15 million. You'll recall, our target for the first 3 years is at least $50 million, so we are ahead of that pace and expect to continue. We are generating strategies through supply-chain efficiencies, operational excellence and cost-savings by leveraging our engineering and administrative capabilities through plant consolidations and specific items that include sourcing, where we have a combined spend of almost $2 billion annually, which gives us great leverage on our suppliers. We've optimized our product portfolio and new product development, where we offer similar products we have selected to the best-in-class for each company -- from each company in each geographical market, and we've eliminated redundant product development and R&D costs. Facility consolidations to date, we've closed or consolidated about 6 facilities, and we are also leveraging our combined geographical footprint to reduce spending on new facilities. An example is the Faiveley existing India facility, where we are utilizing that for the GE locomotive contract as opposed to building a new plant there.

So to summarize, the integration has been a bit more complex than we expected, but we are ahead of our synergy plan and we intend to keep it that way.

So let's now talk about the state of the business in both Transit and Freight for 2018. On the Transit side, with the acquisition of Faiveley and the integration our Transit business has transformed into a truly global player. Over time, that should mean more visibility, stability, better growth opportunities, both organically and through acquisitions, improved margins as we benefit from increased scale and market share and as the aftermarket revenues continue to grow. Currently, the state of the Transit market worldwide is strong. The investment in public transportation continues to grow. We're particularly excited about the growth opportunities in India, where the Indian government just announced the 13% budget increase for Indian railways, including new lines, double tracking and new investments in locomotives, freight cars and passenger coaches. In the U.K., Network Rail just proposed a 5-year plan with a 25% increase in spending on operations, maintenance and fleet renewal. The Danish State Railways, DSB, plans to inject EUR 13 billion into its existing network. And in the U.S., New York City alone has placed one of the largest orders in its history for new subway cars. In Atlanta, MARTA, just announced the plan to replace its entire fleet. So our position within the market continues to strengthen. During 2017, our backlog increased about 20%, as we booked orders in all major markets in all our major product categories and with all our major customers. The projects include supplying components and systems for new cars to the London Underground, for the high-speed ICE trains in Germany, for new TGV trains and Metro Paris cars in France, and for new Metro cars throughout India. During the fourth quarter, we also had organic sales of about 20% as some of that backlog is starting to kick in. And remember that these OEM orders typically lead to long-term aftermarket contracts, which provide revenues and good profitability for 30 years to 40 years.

Now let's move to the Freight market. On the Freight rail side, we see a mix of the improving and still-challenging market conditions. In NAFTA, freight rail traffic was up about 5% in 2017. It's flat so far this year, but some of that could be weather-related. We still see a lot of rolling stock in storage, it's about 20% for freight cars, about 15% for locomotives, although those numbers are starting to come down a bit. I should also tell you that the type of cars in storage do not necessarily represent the type of cars that are needed for the current market requirements. Around the world, freight market conditions are mixed, with growth in some areas offset by sluggish demands in others. Throughout 2017, we saw a modest pickup in our Freight aftermarket revenues, but that outlook has been improving recently. We started to see more inquiries for component servicing and repair and even for locomotive overhaul projects. Our freight backlog has been stable for the past 5 quarters. And as Pat mentioned, our fourth quarter freight revenues showed a year-on-year increase for the first time in 2 years. So far this year, January was a very good month for us in orders for the Freight aftermarket, and February appears to be tracking the same. These are all positive indicators in a high-margin business.

Our 2018 Freight assumptions include the following: rail CapEx, which declined about 10% in 2017, is expected to be flat to slightly up; new locomotives will see a slight increase worldwide but a reduction in NAFTA; new freight cars, we anticipate flat to slightly up in NAFTA. Remember that 25% of our freight segment is outside of rail and in a variety of other industrial markets, which also, we are forecasting a slight improvement.

Let's move to the Train Control and Signaling sector. Train Control and Signaling remains an important part of our long-term growth strategy. In the fourth quarter, our revenues in this area were $103 million, the highest quarter of the year. We ended the year at $322 million, and we expect about 5% growth from this product line in 2018 as our customers push to meet the regulatory deadlines. During the fourth quarter, we booked about $140 million of new Train Control contracts to provide equipment, project management and also aftermarket services for various customers. We announced a $62 million PTC contract with SunRail last week. Other orders include multiyear service agreements with each of the Class Is. Also in 2017, we completed negotiations and booked all our master service agreements with Class Is, several commuter agencies and international customers which represented a strong foundation of over $50 million annually of PTC service revenue. In addition, as we are focused on helping customers meet their deadlines in the near term, we are also investing to ensure that we capture long-term growth opportunities, for instance, our largest single investment in new product development is designed to help maintain our leadership position in the North America PTC market and to leverage our PTC installed base for follow-on features and functionality. Long term, we expect PTC and Signaling will be a growth business for Wabtec based on the following opportunities: multiyear maintenance and service agreements, including software and product enhancements, international growth, project business and continued growth in Signaling through organic investment and acquisitions.

So let's move to acquisitions. Just to comment on fourth quarter. During the quarter, we acquired 3 companies: AM General, Melett and Axiom Rail, combined they represent about $85 million of annual sales. AM General manufacturers fire protection and systems that extinguish fires on trains, and these are becoming a requirement throughout Europe. It has a patented infrared technology solution for both rail and industrial markets and brings a strong aftermarket presence for both components and services. AM's growth opportunities include expanding retrofit markets over the next 5 years, driven by European Union regulations, which have already started in countries like Italy.

Melett is a leader in design, manufacture and supply of replacement parts for high-performance turbocharger aftermarket. You know we have a turbocharger business. We have actually 4 businesses in this area, so this represents a nice complement to those businesses. With operations in the U.K., Europe, North America, China, Melett provides turbo reconditioning, remanufacturing and repair services to customers in more than 100 countries around the world. It provides our existing turbocharger business with an extensive and low-cost manufacturing and distribution base throughout Europe and in China.

Axiom manufactures bogies and adaptable suspension systems for freight cars. So this business complements our Standard Car Truck business very well. Its products reduce track noise and minimize maintenance requirements for customers. Axiom complements our product portfolio with geographical expansion opportunities in a wide range of spare parts and comprehensive aftermarket service network.

So back to long-term, I'm going to wrap up with my prepared comments by talking about our long-term outlook. During 2017, we completed our first strategic plan as an integrated company. Now with the benefit of Faiveley's worldwide transit presence to go along with our strong worldwide market position in Freight and growing demand for PTC and Signaling, this 5-year plan meets our long-term financial goals to average double-digit growth in revenues and earnings through the business cycle with improving margins. To achieve these goals, we have growth initiatives in each of our major product lines, consistent with our 4 corporate strategic objectives: to grow through new product development and technologies; to grow through global and market expansion; to grow through aftermarket expansion; and to grow through acquisitions. 5 years from now, we expect to be stronger, more global, more balanced, more profitable and a less cyclical company.

Finally, to reiterate some of my comments at the beginning of the call. I think we will look back on 2017 as a year of transition and positioning the company for the future. We accomplished quite a bit during the year, and we all believe that our company today is much stronger and better positioned than it was a year ago. We expect to build on those accomplishments during 2018 based on our record and growing backlog, the improvements we're seeing in the Freight aftermarket area and our Wabtec Excellence Program, which gives us fuel to increase margins through cost efficiencies, cost reductions and operational improvements. And we are all committed to, once again, demonstrating our ability to deliver profitable consistent growth in 2018 and in all the years ahead.

With that, we'll be happy to answer your questions.

(Operator Instructions) Our first question comes from Allison Poliniak of Wells Fargo.

Ray, you have talked about a number of obviously, contract wins on Transit, Faiveley, the integration coming in a bit ahead. Can you maybe talk about any of those projects that you won, on a high-level? Was any of that due to the integration of Faiveley with Wabtec? And are you noticing any increasing product content in some of these contract wins?

Yes, so Allison, thanks for the question. We definitely are picking up contracts that leverage the combined capabilities of the 2 companies. As a matter of fact, I would say every project we're bidding on Transit has some complement of ex-Wabtec and ex-Faiveley equipment. So we're increasing our share, we're increasing our overall revenue content, our volume through those, and we certainly have increased our geographical reach. So a good example of that is Australia. We won $500 million worth of business over there on the Transit side. New York, we're in the hunt for the business up in New York. I've mentioned that it's a huge contract up in New York, it's for 1,600 vehicles, the first -- it's about $4 billion investment by the MTA, and the first portion of that is 535 cars. Some of the equipment that we historically we would have bid, obviously, only equipment out of Spartanburg and Plattsburgh, our door and safety systems business, but now we have a combined portfolio, which has enhanced our product offering, so we've been able to go and offer other components like auxiliary power supplies and things like that. So there's a lot of leverage we're getting out of that combined portfolio.

That's great. And then I just want to touch on the margin goals that you had last year. I know you talked about negative mix, but at the end of the Q3 call, you were still pretty confident about a 15% exit rate. What changed there? And I guess, what part of that is dragging in into 2018 that you weren't necessarily anticipating?

Okay, so let's get that over with right now. We went into Q4 thinking that we were on pretty solid ground. We were still going through our project portfolio review process where we were vetting all of our projects in the total portfolio from the Wabtec side, from the Faiveley side, and we found projects during that review process that had issues, in one case related to a project prolongation, i.e. delays, so lack of performance -- timely performance in terms of deliveries, and that equated into a review of inventory associated with that project which resulted in us having to pay charges associated with reconfiguring, replacing obsolete inventories, so you had extra engineering cost, you had extra project management cost, time is money, and the end result is we've finished that portfolio review, thankfully. We -- it's been very difficult and exhaustive process through the entire year last year. We finished it. We believe we have all of our project re-baseline on the Transit side. Those adjustments where we've had to reduce our project margin are going to flow out into '18, the project I just mentioned will be finished this third quarter '18, early fourth quarter. So they're going to bleed out, but we have to absorb them as we've revised them in the project portfolio to date. So that was a process that included both the Faiveley folks and the Wabtec folks. We've come to an agreement on the new project processes we're going to use going forward on how we're going to uniformly state our projects and how we're going to manage them.

The next question is from Jason Rodgers of Great Lakes Review.

Yes, I wonder if you could talk a little bit more about the puts and takes for the first quarter given your guidance of about flat EPS, and it sounds like the Freight aftermarket is picking up and you're getting Faiveley synergies, so just wondering if you could provide more detail there.

So we -- our Freight business is definitely picking up. We have some real nice aftermarket opportunities that we're seeing. We had a very good year -- or month in January. February is continuing, as I mentioned, and I think the year is going to be good for the aftermarket business. Part of that is for things associated with the PTC area, we're picking up, frankly, more contracts than were anticipated. I know everybody's asking why we're not falling off the cliff on PTC, but the reality is, we're still booking business in PTC. We have the aftermarket MSAs. We're getting business, traditional overhaul business now in our services centers for things like compressor valve repairs, things like that. We get inquiries for low-quantity locomotive overhauls. We've booked long-term aftermarket service agreements for components, like air dryers, with one of our major customers and end-of-car cushioning devices. So there's things that have rolled in, Jason, that some we anticipated but some were above even our original forecast and plan. So I think that the bottom line in this Freight aftermarket through both our traditional service businesses as well as PTC is going to be improved, and we have the record backlog in Transit. We have to focus on costs and that's going to help overall with our mix. Pat?

I'm just going to add that I think to just be a little more kind of focused on the numbers is that the flat EPS to the fourth quarter to the first quarter, we are definitely impacted by some of the spending trends in the Transit area. Clearly, the fourth quarter tends to be the strongest in terms of spares and aftermarket parts and the transit authorities are looking in budgets and we've seen now for 2 years in a row, with the combined Faiveley-Wabtec organization, that the fourth quarter can be the strongest business in the Transit world. So you have a little bit of that seasonality or spending trend, if you want to call it, that, that definitely will impact our first quarter and that's why we're showing you and indicating a kind of a first quarter consistent with the fourth.

All right. And as a follow-up, I'm wondering what you're seeing on the raw material costs side of things and if you've been implementing any price increases as an offset.

So we have surcharge agreements in place for commodity increases, and where we don't, basically we try to push those through in price increases. But that's something we obviously pay very close attention to on a daily basis. And for the most part, we're protected with our surcharge agreements.

The next question is from Justin Long of Stephens.

First question I wanted to ask was about the operating margin guidance for 13.5% this year. I wanted to see if we could get some more color on the assumptions within that number. Would you be able to share what you're assuming for the progression of freight margins and transit margins within that consolidated guidance?

No. Justin, we're not really prepared to start forecasting any kind of margins at the segment level. That we've just started providing more information on this in this earnings call, but I expect that the -- that both sets, both segments are going to improve kind of sequentially with the -- as we've kind of indicated for the whole business.

Okay, that's helpful. And secondly, on PTC. So I know for the fourth quarter you said that signaling was $103 million of revenue, but I was wondering if you could provide the PTC component within that number and also if you could share how you're expecting that PTC component to trend within the guidance.

Yes, Justin. This is Tim. So in 2017, total train control and signaling was about [3 22]. Of that, about [1 17] was signaling, so about [2 0 4] was train control. And the guidance for 2018 is about 5% growth in the total. Most of that growth, we expect to come in the train control, PTC portion of that.

Okay, that's helpful. And Ray, I think you mentioned it earlier, but I know you guys have been busy working on new products that could be integrated into this PTC system. And there's some opportunity there. Could you just update us on where you stand in that process? And what's a reasonable time frame for thinking about when some of these new products or enhancements could actually start contributing to revenue?

So we have product from -- Justin, it includes things as straightforward as upgrading CPU cards in our PTC computer, PTC onboard controller; and enhancing our overall operational efficiencies through new functionality in that controller, utilizing the data analytics and monitoring equipment that we continue to quietly grow and acquire. We have a new technology business [last year], Track IQ, which is an acoustic monitoring device that is kind of a mega sensor. It underlays in an infrastructure and goes for about $1 million to $2 million a pop. We are delivering equipment to the Australian customers through Track IQ. And we found a new technology to enhance that. It's a visual data analytics health monitoring system that we can integrate. So those are the kinds of things that we're doing. So we're investing in R&D, product development as well as acquisitions; and we're actually generating incremental revenue now. Long term, our largest R&D project is in the autonomous operation area. That product road map is really about a 5- to 10-year time period, but the 5 years would be for the development. The 10 years would be for adaptation. So it's progressing along pretty well. We're investing significantly in it. And it's a technology that is not an inconceivable application, as you know, from the mass transit side and all the discussions that are going on in trucking. I think there's more receptivity actually today by the Class Is than there ever has been. The government is putting a lot of pressure, as you know from the recent congressional hearings, on agencies to implement short-term PTC requirements to meet the mandate. We have incremental opportunities to support there. So overall, we're putting investments in technology and resources, and we're deriving incremental revenues currently.

The next question is from Sam Eisner of Goldman Sachs.

Just going back to your guidance comments here, I want to better understand. When you're talking top line, you said both segments were going to grow. Is that a total revenue comment? Is that an organic comment? Maybe you could parse out the difference between those 2 segments and those 2 components of it?

Yes. It's -- Sam, it's a total revenue comment, and they're both anticipated to grow. We have a record backlog in the transit side, and the freight business is picking up. Basically in all areas we anticipated that freight car will -- might be down this year prior to this year -- this time a year ago, but it's not. It's going to be flat or up on the OEM side, which definitely growing and picking up business, as I mentioned, on the aftermarket. And PTC on the freight side is going to grow, as Tim just mentioned.

All right. So maybe jumping into the components of that: You guys historically used to give locomotive and railcar deliveries. I might have missed it before. I'm not sure if you guys gave that. Any way to kind of give us your outlook for the industry and what you think those delivery numbers might be?

Yes. Sam, this is Tim. So in North America, NAFTA for freight cars, last year, was around -- 2017 was around 45,000. We think it'll be flat to slightly up in 2018. The locomotive number, I think, ended up for 2017 around 400 to 500 for -- again, for NAFTA. That's going to be lower probably in the 200 to 300 range.

Yes. And that -- Sam, that's really the only area that's going to reduce this year in the market, at least in North America. It's going to be the locomotive. Everything else is trending up.

Got it. That's helpful there. And again just going back to the transit. I mean pretty strong organic performance there. Is there timing of deliveries that are impacting that? I mean obviously now your business is becoming more of a project-based business rather than necessarily a component- or aftermarket-based business, so I'm just curious. How should we think about timing of various deliveries going forward? Is there a particularly big contract that was delivered this quarter? And kind of what's really the outlook there that we should be thinking about?

So we have a couple hundred projects, Sam, in our project portfolio on the transit side. And those get delivered. The projects normally are 3 to 5 years. They get delivered over about a 2- to 3-year period because the first year is basically engineering, design and development work. And the last year is commissioning and warranty. So those are all programmed out in our backlog. And yes, we have very specific project schedules and time lines associated with those, and they are all in different phases of completion as we speak. And we think that's going to continue to grow. Obviously, as we continue to book orders, our backlog will continue to grow. And we'll be able to program those out pretty definitively over future years.

Understood. If I can just sneak one more in. Pat, the first quarter guidance for EPS, what is the tax rate that you guys are assuming there? Because you did say that the tax rate is going to jump around a little bit throughout the course of the year.

Yes. So 23.5% is the tax rate we just assume for each quarter, which is our year -- full year estimate.

The next question is from Scott Group of Wolfe Research.

So I wanted to just follow up on the revenue guidance. So fourth quarter, I think, organic sale is up like 13%. Looks like you're guiding, I don't know, [4 to 5] same-store revenue growth for '18. So maybe give us some of the puts and takes of what's driving the deceleration in '18 relative to what you just saw in the fourth quarter.

Do you want to take it, Pat? Or do you want me...

Yes, yes. So we didn't -- so I'm going to just kind of describe it kind of anecdotally, not -- I didn't do a bridge from the 2 quarters, but the 2 biggest things that really impact us is you're going to have the transit service business, which what we found is that the Q4 tends to be the strongest where we're delivering spare parts and other aftermarket-type things to our customers, especially in Europe and overseas. That is definitely our strongest area and represents kind of a normal process. We used to see it in the Wabtec stand-alone businesses, but it just wasn't as material. And now we see that definitely that is -- creates a sales jump in the fourth quarter versus the first quarter. There are also a little bit of impact of -- in the electronics area, where we see good sales in the fourth quarter and that tends to slow a little bit in the first. So those are the 2 big items that really kind of change the sales, timing, the mix in quarter-on-quarter.

Okay, helpful. Pat, I think, last quarter, you guided us to $115 million to $125 million a quarter of SG&A. And now it's up to, I don't know, $135 million, $140 million. What's the delta there?

Yes, that sounds -- I have to go back and check what we talked about. I mean clearly we're running a little bit higher on the SG&A. We've -- and going into '18. What we've done is we are definitely incurring some extra costs in investments in the -- some of our infrastructure for the functional areas of our business as we combine the Wabtec and Faiveley area. The -- we're still making investments in systems and in business processes to really improve our performance. We have a little bit of related to sort of compensation and incentive compensation. Last year was kind of low for us, but we're kind of getting back to normal on the whole thing. And then last, we did the acquisitions in the fourth quarter. And when you add those acquisitions, that increases the SG&A on a run rate.

Okay, makes sense. Just the last couple quick ones. You mentioned a couple times really good January orders in freight aftermarket. Can you just put a number on that, how much they were up year-over-year, something like that?

The whole orders in January...

Well, you -- I -- you made a couple references to how good January freight aftermarket orders were...

Yes. So maybe rather than give you an actual number, Scott: They were up by about 10% on what we had in our plan for January. So in our plan for new orders, we were about 10% above that.

Okay. And then maybe just my final one, the you -- I think you mentioned that you have a -- something you're working on that's going to have ability for the trains to be sort of autonomous within 5 years and then take a period of time to get implemented. Can you just add some more color in terms of what you're working on and...

Yes. We're working on basically to develop a failsafe technology onboard and a failsafe technology for office systems that would allow the trains to communicate train to train and train to office, which would eliminate the requirement for wayside equipment. It should be a major savings as well, as it'll allow you to take people out of the cab.

The next question is from Matt Elkott of Cowen.

I want to ask a broader question about the margin guidance for 2018. So you guys are calling for roughly 6% revenue growth. A meaningful part of that should come from the freight aftermarket business, which as you noted earlier is a high-margin business. And your -- I understand there are some transitory project costs that are continuing in 2018, but they should be subsiding towards the back half of the year. So the margin guidance, given where the growth, the top line growth, is coming from, seems to be just a bit light at 40 basis points. How much of that is related to the SG&A costs that you just mentioned in the previous question?

Well, I think the impact -- I mean SG&A is -- I mean it's a little bit of it, but you also have the acquisition contribution margins coming through related to that at the incremental SG&A. So it's not entirely all because of the SG&A going up, yes. And we should -- what -- I think that the more -- the item that impacts it more is the -- that these projects that we've taken adjustments on in Q3, Q4, really are the catch-up kind of cumulative impact on margins. But then you still have a project with a runout rate that's not kind of typical and not in our average for transit and freight projects. And so we have to -- in essence, we have to deal with that a little bit in the margin in the first half of the year. But the average is definitely 13.5%. We expect to end higher. We're not ready to kind of give EBIT margin by quarter, but that's what we're going to have for the year.

I think, Matt, one of the things that maybe we ought to share with you, it was -- this is the first year we had a bottoms-up fully integrated budget. Last year, we closed 1st of December. We were just putting the businesses together. And we kind of aligned those 2 budgets, but I think the budget that we put together is one that everybody's bought into their -- it's bottoms up. It's a management team's budget, and it's a budget we believe we can deliver. So -- and said a different way, I think people feel better about the budget this time this year than what they did this time last year.

Got it. That's very helpful. The -- and speaking of the freight business, the $9 million organic sale decrease in the fourth quarter. When you were thinking about your 2018 guidance, where does this number -- does this decline? Does it moderate? Does it stay stable? Or is there -- or could there be organic growth in 2018?

So there's definitely going to be organic growth in '18. We have -- for a couple reasons. Number one, freight car sales are going to go up. The aftermarket sales are going to go up. We have international business opportunities. We have the benefit of full year revenues associated with acquisition companies that were in the freight area. A good example of that is ATP, where we bought a company that does gates and hatches for vehicles. So we'll not only get the full year benefit of ATP. We'll get the international growth associated with ATP. And then on top of all that is the PTC area, which I've mentioned before. I know people are frustrated about PTC because they expect it to be going away and don't understand why it hasn't, but it's actually is going to go up for us in '18.

I think there's one railroad that's already announced that they are not going to be 100% compliant by the current date. We could see that from other railroads. Does that have any impact on the cadence of your PTC revenues? If we see more railroads say, we need some more time.

Well, I don't really point -- maybe answer your question by a historical look. When everything was supposed to be done in '15 had it been done, we wouldn't be sitting here increasing our revenues going into '18. So our goal is to support our customers. They have very capable resources and -- but also huge programs. They've committed flat to up CapEx. They've injected a lot of CapEx up till now. We try to work with them side by side. And we're looking for every opportunity to support them that we can through what's going to end up a very difficult year. There's going to be a lot of scrutiny and oversight obviously because of the unfortunate accidents that recently occurred at some transit on the CSX line.

Got it. Just one quick follow-up on the aftermarket freight. You said that you had a second sequential year-over-year growth. Is there any way you can tell us by magnitude, was this quarter's growth higher or lower than last quarter's growth?

Do you know, Pat?

I think it was pretty similar. Percentage-wise, it's pretty similar.

Yes.

Okay.

Okay. And just one final question on a different subject. Ray, you mentioned the MTA orders in New York. There's also a plan or a proposal to build a streetcar between Brooklyn and Queens. There are streetcar projects going. It's planned or ongoing around the country. Are you guys -- do you have content in these streetcars? And if so, can you give us an idea how it compares to your content in the subway cars? I would imagine it's lower.

Well, it's low on a volume basis only because a streetcar LRV is less expensive than a metro car, but it balances out a little bit because of your lower volumes. And lower volumes tends to result in higher price, so -- but our content is about the same per car on a percentage of total price. We have similar technologies we can offer. We have braking systems, couplers, doors. So we have quite a bit of content on LRV systems around the country. And again, we're in a 60% to 70% market share position for that particular market sector also.

The next question is from Saree Boroditsky of Deutsche Bank.

So as the transit prices with lower margins flow out in 2018, do you expect margins to step up more significantly in 2019? I know it's early, but just some general comments would be helpful, as we think about the earnings power of that business.

Yes. So we expect our margins to improve year-on-year, Saree, in every one of our businesses. That's a requirement that we give to our group presidents and operating team. And they achieve that through really multiple ways. One is through growth. One is through cost reductions. We've given a mandate for a 2% improvement year-on-year on the cost side. Part of that is to offset inflation, material costs. It was brought up before, but some of it should drop to the bottom line, so -- and if you look at our 5-year strategic plan, which I know you can't, but we can't -- it shows growth year-on-year in every one of our segments.

I guess, rephrasing the question a little bit: How much of a burden do you think some of these lower-margin projects are in 2018 on the transit side that goes away as those kind of roll off?

Yes. So they're -- it's a drag on our business. There's no question about it. They're projects that are break-even or loss projects, and we obviously don't want that. We don't want to bid at that level and we don't want to execute at that level. So once we bleed those out of our total portfolio, project portfolio, the margins will continue to go up.

Okay, that's helpful. And then just a follow-up: I appreciate the color on the locomotive deliveries in 2018. I was wondering if you thought that would be the trough in North America. Or will it continue to be a challenging market in 2019?

Yes, I do think it's going to be the trough. And I guess one of the things we should have mentioned is going into the year -- when we put our strat plan together midyear last year, we actually thought it was going to be worse than even that sector, worse than what it is turning out to be. We get forecasts from each of our customers. And midyear last year, GE was of the opinion that they may not end up with any new OEM locomotives, and here they are. They come out of the box in January with 200 new locomotives with Canadian National. So we saw that as -- and we're on those locos. So we saw that as a pretty nice surprise the time we get that order.

The next question is from Matt Brooklier of Buckingham Research.

So I had another PTC question. What -- for '18, what are you assuming in terms of contribution from PTC aftermarket and services? Ray, I think you had mentioned a number, but I just wanted to get a little bit more color on what that business is potentially yielding for you in '18.

Yes. So Matt, I mentioned the $50 million as a full year run rate on MSAs that we have already booked. So there's possibility we'll book more throughout the year. They won't come from Class Is any longer because we have those in our backlog, but we could book more in the commuter side. So they're going to be smaller than the Class Is, but they're still significant in terms of margin generation. So $50 million minimum, I will say.

Okay, that's good to hear. So it sounds like that's the baseline. And I guess, as -- freight and then (inaudible) agencies, as they go live with their systems, you would -- that would contribute to that number potentially, I guess, moving upwards, as the year progresses, okay. And then is the mindset still you still think you can potentially garner like 5% to 10% of the total PTC installed base that could result in kind of the baseline of aftermarket revenue on a go-forward basis? Is that 5% to 10% number still a good number to use?

Yes. We believe that we'll be able to meet or exceed that.

Okay, that's helpful. And then you mentioned earlier on the call Faiveley. You're ahead of your -- the synergy expectations. Maybe if you could provide a little bit of color in terms of what resulted in you guys being able to, I guess, garner incremental synergies ahead of the original $15 million this year. And I guess, what's the potential for there to be -- the potential for upside synergies with Faiveley as we work through the rest of the integration?

So I think what we -- when we put our plan together, we programmed this as best we could over a 3-year period. We tried to be very aggressive about how we managed it. We still have Al Neupaver sitting at the chair seat. And he's pushing constantly on us to accelerate our cost improvements and integration process. So you guys probably anticipated it was conservative, the plan we put forward, but it was -- until we got into it, we really didn't know how quickly we'd be able to accelerate. We got some quick wins. We had wins where we closed a service shop in Shreveport, Louisiana very early on. We consolidated 2 up in Salt Lake City. We had an opportunity to move some product lines into service shops. So we're moving some -- there's some that have a lot of mass that we can do faster. And an example of that is down in Greenville-Spartanburg, where Faiveley had their largest operation and we have large transit brake business. We're consolidating, as we've mentioned that before, and integrating those businesses. So we're pushing as fast as we can on all those projects, but projects like that, there's just a lot of complexity and mass to those, so those will taper over. That one, we anticipate we'll get into in a very substantive way this year. All the planning is done and the initial work is behind us, but the actual implementation will come this year. So the ones we could get done faster, we pushed on. And the other ones are, I'd say, pretty much on track. We're looking for more, to answer your question. We're looking for more over the next year, 2 years, for other opportunities for further consolidation really focused on cost improvement. We want to drive our cost structure improvements down. And we didn't get the benefit that we would have anticipated because of some of the project performance issues that offset the benefit at the end of the day last year.

The next question is from Kate Pettem of Rathbone.

I've got 3 quick cash flow questions and then a couple extra questions, please. How much did you spend, in cash terms, on restructuring and integration in 2017? And what would you expect for 2018? And then is working capital where you want it to be, or can improvements be made? And then the final one on CapEx: You used to spend about $50 million a year before Faiveley. Now you're spending $120 million in this coming year. Is that a permanent increase? And what are you spending it on?

Okay, so starting with the CapEx number. We have -- I would say that the Wabtec historically has kind of underspent in the CapEx area. We would always have a conservative budget but would -- we tend to -- in the process of making sure that the projects were providing the payback that we expected, we would kind of under -- come in under our budgets. I'm expecting we'll have a little bit of that in the $120 million, but I think it's a good, conservative number. There are clearly some cost and -- expenditures, rather, in that $120 million that is related to the ongoing synergy plans and also some of the CapEx plans that we -- when Faiveley came over and their -- and executing their strategic plan. That is continuing on, for example, where we invest in some plants in Eastern Europe and also in India. So those are kind of onetime. And I would expect that number to come down a little bit. Working capital, we need to improve working capital. It's been -- for us, it's been throughout the year a slow improvement. I went back and looked, and our accounts receivable DSOs did improve in the second half of the year. Our inventory DSIs improved in the second half of the year. Other assets related to contract investments were offset by deposits, but we need to do better. We did so -- we didn't do so well in the first half of the year that we were never quite able to make up the difference. We expect to get back as a -- our goal, as always been, is that our cash from operations will exceed our net income. And that's what everybody gets measured on around here and we expect to achieve...

Do you expect to achieve that in 2018?

Yes.

Yes, absolutely. And...

Okay. And then on cash spent on restructuring and integration...

Okay. So yes, we were kind of pulling that together. So we definitely had -- I'm going to -- our estimate right now is about $60 million were spent on restructuring. And some of that on a cash flow basis were costs that had been recognized or accrued at the end of '16 and paid in '17. And then you throw in the costs that we would have added back in the 2017 results. So that's about $60 million in total when you add those 2 things together.

Okay. And in 2018...

2018, we're -- I think we're -- conservatively have an estimate that we think -- and this is not in our guidance. We exclude restructuring in our guidance -- about..

No, this is a cash number I'm interested in, yes.

Yes. So we would spend about $10 million...

Okay. So the bulk of that spend is now done, if that's the right way to think about it. Is it?

I think so, but we're constantly going to be looking at opportunities to generate synergies. And so that's kind of our plan.

Yes, of course, yes, okay. Now the 2 other questions, the first one is I got a little bit confused. So in the text of your -- your initial text, you were talking about startup costs in a project in the U.K. And then in the answer about what went wrong on guidance in Q4, you talked about some project costs. Are they -- is that the same project, or are they 2 different projects?

Yes...

Okay. And what is that project exactly?

So we don't want to talk about a specific project and customers, but it's a large project.

Large project that is in the U.K. And is it with one of the train operators, or was -- is it with TfL?

No, it's not with TfL.

Okay, all right. And then the last question is, given how bad the industry bodies have been at predicting growth in freight and locomotives, they didn't see the downturn coming. They were too conservative this year. Is it -- is that something that you use religiously when you give us our guidance or when you make your own budgets? Or are you now sort of questioning that and tweaking things on your own?

Yes. Kate, this is Tim. That certainly is one thing we look at, but it's obviously based on a lot of discussions that we have, detailed discussions, with all the customers. Some of it's looking at industry information, industry data that's out there and available to probably everybody; and then again detailed discussions with customers. And we roll that all up into our assumptions for the year.

Okay. I guess I'm -- just what I'm kind of asking to is, particularly since the downturn in freight was so sudden and caught us, at least me, over in the U.K. off guard, how have you changed your predicting? And how -- what information do you look at that you didn't use to look at before to give you confidence when you make your plans? And this is my last question.

So yes. So Kate, we look at every piece for information we can possibly get. We're talking with our direct customers and then their customers. We're looking at industry trends. We're looking at traffic. We're looking at commodity changes, for instance, right now in the oil and gas industry in the states. More rigs are being drilled now. As a result, there's more white sand and frac sand that's being hauled, less oil, less crude but more sand. So we are constantly monitoring the transit market through our marketing people; our customers; and our service folks; and I should say also, budgets. We're reviewing the budgets of the end users constantly too.

The next question is a follow-up from Justin Long of Stephens.

I know it's been a long call, but Pat, I did want to just check on a couple items on the guidance real quick. First, you mentioned $15 million of synergies. I just wanted to clarify. Is that a net synergy number? And then second, could you talk about the impact from FX that you're assuming for both the top line and bottom line in 2018?

Okay, in terms of FX, you know what, I -- we're using as current rate as we can. I mean that's I'm not sure what you mean in terms of guidance. I don't think it's -- well, clearly there's a little bit of an improvement that we have from last year, but I don't think that going forward it's going to change that much. So the -- in the fourth quarter, we did talk about the impact of FX, and it was about $17 million on sales. And it -- but it was kind of -- it wasn't material to the bottom line, so -- and then...

Okay, so -- stable rate from today.

Yes. I -- exactly. I think that we tend to have a kind of a natural hedge in terms of all our currencies. We've got the pound, euro exposure; Australia dollar [kit]; and then -- and some of our costs in Canada. Some of our Canadian operations are cost only. So all in all, I think it's pretty stable.

Okay, great. And then the synergy number, the $15 million, was that a net number or a gross number?

You're asking if it's net of cost incurred? Or is it just a -- just net synergies? Because it -- in my mind, it's just the synergies we're going to achieve. We don't include the costs to achieve those synergies in that number.

Okay, got it. I just wanted to make sure.

(Operator Instructions) There are no questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Tim Wesley for closing remarks.

Okay, thanks, Kate. Thanks again, everybody, for being on the call. So we'll talk to you again in a couple of months with the first quarter results. And then again, mark your calendars for May 7, our Investor Day in New York City. And watch for more details.

Thanks. Have a good day.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.